IBM files suit against Hoosiers in wake of lost welfare contract

According to statements released from the company, IBM filed suit today seeking payment for work the company performed on the state’s welfare eligibility system. IBM says its short $125 million in fees and equipment expenses stemming from the 2006 $1.34 billion welfare modernization project.

Indiana Gov. Mitch Daniels said the state’s eligibility computer system was “broken” before completing a contract that would outsource most of the Indiana Family and Social Services Administration (FSSA) welfare duties. In 2006, IBM and subcontractor ACS were awarded a ten-year, $1.34 billion contract to modernize the way Hoosiers applied and received welfare benefits. But due to a series of early complications, a drastic uptick in welfare applicants and the tightest budgets seen since the Great Depression, three years later FSSA was still looking like the pre-contract agency, dealing with sizable backlogs in Medicaid, food stamp and TANF applications.

IBM was removed from its duties in October 2009 at the behest of the Governor and a growing outcry from politicians in Indianapolis. With IBM out of the picture, ACS assumed lead role in a new strategy that was to see a “hybrid” welfare system. This hybrid system will use much of the technology originally envisioned under the terms of the original contract, but it will use FSSA employees instead of outsourcing/ eliminating the human elements of the eligibility process.

According to FSSA administrator Anne Murphy, Indiana has paid IBM $437.5 million, in addition to $2.64 million in “disengagement costs” as of the end of March, receiving “minimal value” in return. But IBM officials claim that because this new hybrid system is using “IBM technology, infrastructure, applications, automated processes and systems,” it underscores the company’s “contributions to an improved welfare eligibility system in the State.”

IBM is asserting that by not covering expenses incurred at the outset of the project, when the company agreed to defer payment, Indiana is violating terms of the contract. Under the contract, payment of those expenses is owed to IBM if it is removed from the project “for any reason,” the company said.
In its court filing, IBM acknowledges that the contract gives Indiana the right to replace it as the lead contractor and that “All IBM seeks are those payments that the State promised would be paid to IBM in the event that the State chose to terminate.”

Despite the lost contract, the legal battles and the negative press, IBM is moving ahead with similar projects across the country – last week they landed another job with ACS as the prime in California. The duo will be partnering with CGI Group to modernize the state’s Medicaid Management Information System for a reported $1.6 billion.